Life insurance is one of the most versatile financial assets available to us. Few solutions carry as many tax advantages, cover as wide a variety of situations and come at such a range of costs.
With so many different types of life insurance, finding the most suitable policy takes careful consideration. We’ll help you find the best possible solution, but before you meet with an advisor, having a basic understanding of the different types of life insurance can help.
Life insurance typically falls into three main types, but unique needs can call for sophisticated planning and novel application of a particular policy. Generally though, each type of life insurance correlates best to a specific need:
Generally characterized by providing a high death benefit for a relatively low cost over a finite period of time, term insurance is just that: life insurance you take out over a certain “term” or finite length of time – a 20- or 30-year term, for example.
We favor term insurance for two general purposes:
- Income replacement
- Debt security
“Income replacement” is what we think of when buying life insurance to protect our family. Should something terrible happen to a family member, the decedent’s income continues to flow to the family from the death benefit paid out by the life insurance company.
Another use is to protect against debt. A family may want life insurance to secure a mortgage or business partners may want life insurance to secure a loan they are taking for their company.
Generally, term insurance is a perfect fit when there is a defined need that will last for a known period of time and costs need to be managed.
Universal Life Insurance
These policies provide a permanent death benefit with a variety of different premium schedules.
While this is a very versatile type of protective life insurance, we find this solution works best when clients are only focused on providing permanent death benefit protection for the lowest cost.
Like other permanent life insurance policies, universal life offers cash accumulation features, different funding options and premium payment flexibility. Universal life policies can be built to meet those needs, but the most common application is providing the highest permanent death benefit for the lowest cost.
Whole Life or Cash Value Life Insurance
These policies provide a permanent death benefit while building cash value inside the policy that can be accessed prior to the death of the insured.
Whole life, or cash value life as it is sometimes referred to, provides permanent death benefit coverage similar to universal life. The primary difference is cost. Because of the emphasis of a cash value account and other policy features, whole life generally carries the highest premium among the three policies.
If we utilize whole life, it is generally as an accumulation asset – not a primary means of life insurance coverage. Clients can fund a cash value life policy, earn a rate of return on their premiums, and later use the cash values as another pool of money. Because it is life insurance, Congress provides favorable tax treatment to this asset. When coupling the taxation and the returns on the premiums clients pay, this policy can become a compelling option as another account to build up cash.
Whether you’re life insurance needs are simple, or you have a complex situation and need a more customized solution, our risk management team is here to help. Set up your complimentary consultation today to find the solution that’s right for you and your family.